During the third quarter, analysts lowered earnings estimates for companies in the S&P 500 for the quarter. The Q3 bottom-up EPS estimate (which is an aggregation of the median EPS estimates for all the companies in the index) has dropped by 1.1% (to $40.54 from $41.00) during this period. How significant is a 1.1% decline in the bottom-up EPS estimate during a quarter? How does this decrease compare to recent quarters?
During the past five years (20 quarters), the average decline in the bottom-up EPS estimate during a quarter has been 3.2%. During the past ten years (40 quarters), the average decline in the bottom-up EPS estimate during a quarter has been 4.8%. During the past fifteen years (60 quarters), the average decline in the bottom-up EPS estimate during a quarter has been 3.9%. Thus, the decline in the bottom-up EPS estimate recorded during the third quarter was smaller than the five-year, 10-year, and 15-year averages.
Excluding the three sectors (Communication Services, Consumer Discretionary, and Information Technology) impacted by the recent company and sector reclassifications in the index (as the bottom-up EPS estimates for these three sectors on June 30 reflect the previous sector classifications), seven of eight sectors recorded a decline in their bottom-up EPS estimate during the quarter, led by the Energy (-4.4%) and Consumer Staples (-4.0%) sectors. On the other hand, the Financials (+0.2%) sector is the only sector that recorded an increase in its bottom-up EPS estimate during this period. Overall (again excluding the three sectors previously mentioned), five sectors recorded a smaller decrease (or an increase) in their bottom-up EPS estimate relative to their five-year and 10-year averages for the quarter, while four sectors recorded a smaller decrease (or an increase) in their bottom-up EPS estimate relative to their 15-year averages for the quarter.
As the bottom-up EPS estimate for the index declined during the quarter, the value of the S&P 500 increased during this same period. From June 30 through September 28, the value of the index increased by 7.2% (to 2913.98 from 2718.37). The third quarter marked the 16th time in the past 20 quarters in which the bottom-up EPS estimate decreased during the quarter while the value of the index increased over this same period.
John’s weekly research report, Earnings Insight provides analysis and commentary on trends in corporate earnings data for the S&P 500, including revisions to estimates, year-over-year growth, performance relative to expectations, and valuations. He is a widely used source for the media and has appeared on CNBC, Fox Business News, and the Business News Network. In addition, he has been cited by numerous print and online publications such as The Wall Street Journal, Financial Times, The New York Times, MarketWatch, and Yahoo! Finance.